Derivatives

Is gold set to fall further?

Akhil Nallamuthu | Updated on February 27, 2021

Bond yields are likely to go up and so will the dollar; these two factors can be a drag on bullion prices

Gold prices were kept under pressure by rising US treasury yields over the past one month. But the dollar had limited impact on bullion prices as it was flat for most part of the last three weeks.

However, last week, higher bond yields in US started to attract significant inflows into dollar denominated assets, resulting in higher demand for the dollar. The 10-year yield rose to nearly 1.41 per cent on Friday compared to 1.34 per cent last week.

On the other hand, the dollar index – a measure of dollar value against a basket of six major currencies – posted a weekly gain of 0.6 per cent by closing at 90.88. Consequently, the price of gold registered a fresh eight-month low on Friday. The price of silver too saw a decline.

The price of gold dropped by 2.8 per cent last as it ended at $1,733.5 whereas silver lost 2.2 per cent and closed at $26.62 on Friday. In rupee terms, both gold and silver fared better. Because the rupee, which was inching upwards since the beginning of the week, saw a substantial depreciation on Friday. As a result, the domestic unit lost 1.1 per cent against the dollar and ended at 73.47 on Friday. So, in rupee terms, the price of gold (April expiry futures) on the Multi Commodity Exchange (MCX) ended at ₹45,736 (per 10 grams), down by 1 per cent and the price of silver (May expiry futures) on the MCX closed at ₹68,784 (per Kg), down by 1.9 per cent for the week.

In the coming weeks, yields are likely to go up and so will the dollar. While these two factors can be a drag on bullion prices, weakness in rupee which is likely to be extended, can limit the downside in price in terms of the rupee.

MCX-Gold (₹45,736)

The gold futures on the MCX, which saw a minor rally on the first session of last week, reversed direction on facing the resistance at ₹47,000. The contract was then on a decline throughout the week and on Friday it closed below the support at ₹46,000.

Because the recent trend has been negative and now that the price has slipped below ₹46,000, the futures can be expected to depreciate towards the crucial support band of ₹44,700 and ₹45,000.

Traders who are holding shorts can consider liquidating those positions at this price band since there can be a bounce off these levels. On the upside, ₹47,000 can be a strong hindrance and until price remains below this level, gold futures will be under pressure in the near-term.

Noticeably, indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) indicators on the daily as well as weekly chart remain in bearish territory. Moreover, the daily average directional index (ADX) shows that bears are still ruling stronger than bulls.

While gold prices can come under pressure globally, the weakness might not fully translate into rupee terms and gold futures can remain volatile in the short run because of the rupee exchange rate against the dollar. Hence, traders need to be watchful of the price levels mentioned above. Over the course of a year, the likelihood of price touching ₹56,000 has not completely waned notwithstanding short-term volatility. The support band of ₹44,700 and ₹45,000 holds the key.

MCX-Silver (₹68,784)

Unlike gold futures, the price of silver futures saw very few big price swings over the past week. The contract was flat through the week, fluctuating in a very narrow range and stays within the range of ₹68,700 and ₹72,000. Trading has been confined within this price band for the past three weeks and taking the recent price action into account, the futures is likely to stay within these levels. The direction of the break can give us clues as to the next leg of the trend.

Affirming the sluggish nature of price movement, indicators like the RSI and the MACD on the daily chart has been flat since the beginning of the current month. Yet, the contract was dragged below both 21- and 50- DMAs on Friday, giving it a bearish bias. Nevertheless, until either ₹68,700 or ₹72,000 is breached, uncertainty will revolve around the contract's short-term trend.

Despite the near-term ambiguity, there has been no real threat to the long-term uptrend which means the price of silver futures can touch ₹80,000 within one year. But en route it can face resistance at around ₹75,000. The breakout of ₹72,000 can bring in significant amount of buying pressure resulting in eventual breakout of ₹75,000.

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Published on February 27, 2021
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